INTRODUCTION TO ISLAMIC FINANCE

Developing story on why usury became innocent in Christian-Jews World and how Muslims created foundations for a sophisticated financial world

International Islamic Banking and Finance Certification ProgramJoint Cooperation Between University Mohammed V Morocco

and Tazkia University College of Islamic EconomicsBogor, September 2014

The Ascent of MoneyThe Ascent of MoneyThis 4 hours

documentary film won Emmy Award !

Our main source

History of Banking according to Shakespeare : History of Banking according to Shakespeare : The Merchant of VeniceThe Merchant of Venice

The Seven Circle in Hell for UsurersThe Seven Circle in Hell for Usurers

In Florence's Duomo(cathedral) there is a fresco by Domenico diMichelino that shows the great Florentine poet Dante Alighieriholding his book the poet Dante Alighieriholding his book the Divine Comedy. As Dante imagined it in Canto XVII of his masterpiece, there was a special part of the seventh circle of Hell reserved for usurers

We know that all Abrahamic religions prohibit usury, why it seems that only Islam still hold the principle?

The Medici Family & The Medici BankThe Medici Family & The Medici BankThe House of Medici was a banking family, political dynasty and later royal house that first began to gather prominence under Cosimo de' Medici in the Republic of Florence during the late 14th century.

The family owned the Medici Bank, the first and largest banking-institutionin Europe during the 15th century. Among their arts collection at the Medici House are Michelangelo, Leonardo daVinci, and others prominent artists. The Medici produced four Popes of the Catholic Church—Pope Leo X (1513–1521), Pope Clement VII (1523–1534), Pope Pius IV (1559–1565), and Pope Leo

What happened if a family had usury-based bank and the family members became Popes ?

1521), Pope Clement VII (1523–1534), Pope Pius IV (1559–1565), and Pope Leo XI (1605s)

The Medici Bank was one of the most prosperous and most respected institutions in Europe. There are some estimates that the Medici family were the wealthiest family in Europe for a period of time. A notable contribution to the profession of accounting was the improvement of the general ledger system through the development of the double-entry bookkeeping system for tracking credits and debits.

The Ultimate : Bank of VaticanThe Ultimate : Bank of Vatican

The Institute for the Works of Religion (Italian: Istituto per le Opere di Religione – IOR), commonly known as theVaticanBank, is a privately held institute[1] situated exclusively on the sovereign territory of the Vatican State and run by a Board of Superintendence which reports to a Supervisory Commission of Cardinals and the Pope.

Brief SummaryBrief Summary Islamic (also all Abrahamic religions) avoid◦ Usury (or interest or riba)

◦ Cheat (the Quran has more ayat on cheating scales than on usury) and its bigger conception : despotic or dzalimdespotic or dzalim

◦ Gamble, speculation or gharar

The 500 years development of interest-based, speculative and cheating financial world could be ends up some day. It is our together efforts that matters. All of us, regardless Muslim or not.

New Economic AgendaNew Economic Agenda

The proper purpose of an economy is to secure just, sustainable, and joyful livelihoods for all.

GDP is a measure of the economic cost of producing a given level of human well-being and happiness.

A rational reallocation of real resources can reduce the human burden on the Earth’s biosphere and simultaneously improve the health and happiness of all.

Markets allocate efficiently only within a framework of appropriate rules to maintain competition, cost internalization, balanced trade, domestic investment, and equality.

A proper money system roots the power to create and allocate money in A proper money system roots the power to create and allocate money in people and communities in order to facilitate the creation of livelihoods and ecologically balanced community wealth.

Money, which is easily created with a simple accounting entry, should never be the deciding constraint in making public resource allocation decisions.

Speculation, the inflation of financial bubbles, risk externalization, the extraction of usury, and the use of creative accounting to create money from nothing, unrelated to the creation of anything of real value, serve no valid social purpose.

Greed is not a virtue; sharing is not a sin.

The only legitimate reason for government to issue a corporate charter extending special privileges favoring a particular enterprise is to serve a clearly defined public purpose.

Public policy properly favors local investors and businesses dedicated to creating community wealth over investors and businesses that come only to extract it

How Muslims Change Financial WorldHow Muslims Change Financial World

Transaction instrument : the modern cheques comes from the Arabic saqq, a written vow to pay for goods when they were delivered, to avoid money having to be transported across dangerous terrain. In the 9th century, a Muslim businessman could cash a cheque in China drawn on his bank in Baghdad

Financial assets : shares is a direct trans literati on syirkah with almost100% same meaningalmost100% same meaning

Complex financial assets such as futures and options developed by Muslims as a tool to avoid speculation

The development of a sophisticated financial world should be build in a very reliable and trusted society as agency problems and its specific disease : moral-hazard should be minimized. Muhammad saw before became a prophet was a very trusted merchant. The term hazard itself comes from Arabic alzahr mean dice or gambler to express a person whom very unreliable

How How RasulRasul saw. Develop Salamsaw. Develop Salam From Anas bin Malik ra, ب�ی�عِ ع�ن� ن�ھ�ى سلم و علیھ هللا صلى ا��ِ ر�س�ول� أ�ن�

ق�ال� ت�ز�ِھى� و�م�ا ق�ال�وا ت�ز�ِھى� ح�ت�ى الث�م�ر�ةِ ف�ِبم� الث�م�ر�ة� ا��� م�ن�ع� ِإذ�ا ف�ق�ال� . ت�ح�م�ر�

علیھ متفق. أ�خِیك�؟ م�ال� ت�س�ت�حِل� ”Rasulullah saw forbids fruit selling until its mature“

And then Rasul said “If Allah decide that harvesting is ”Rasulullah saw forbids fruit selling until its mature“

And then Rasul said “If Allah decide that harvesting is not going to happen, on what cause you can take your brother’s money ? (Bukhari no. 2198 dan Muslim no. 1555).

Hence, bonded sale on agricultural products is forbidden because it has a gharar. Instead, the sale should specify quantity and quality of future delivery on current agreed price (what we call “Salam”)

Finally : Finally : Salam as FuturesSalam as FuturesThe farmer is helpless before the risks of weather and insects, but he can at least escape the uncertainty of what his selling price will be. He can do that by selling his crop when he plants it, promising future delivery to the buyer at a prearranged price. He may miss out on some profit if prices rise, but the futures contract will protect him from catastrophe if prices fall. He has passed along the risk of lower prices to someone else.

That someone else is often a food processor who faces the opposite risk-he will gain if the prices of his inputs fall while the crop is still in the ground, but he will be in trouble if prices rise and boost the cost of his raw materials. By taking on the famler's contract, the processor lets the famler assume the risk that agricultural prices might rise. This processor lets the famler assume the risk that agricultural prices might rise. This transaction, involving supposedly risky contracts for both parties, actually lowers total risk in the economy.

In the twelfth century, sellers at medieval trade fairs signed contracs, called lettres de faire, promising future delivery of the items they sold. In the 1600s, Japanese feudal lords sold their rice for future delivery in a market called dto-ai-mal under contracts that protected them from bad weather or warfare. For many years, in markets such as metals, foreign exchange, agricultural products, and, more recently, stocks and bonds, the use of contracts for future delivery has been a common means of protection against the risks of volatile prices. Futures contracts for commodities like wheat and copper have been trading on the Chicago Board of Trade since 1865. And it considered as a foundation to the development of American agribusiness.

Bernstern (1998) on History of Risk

Islamic Financial Industry in Indonesia

Investopedia

Investopedia

Damodaran , Stern Business School